US Tax Reform

By Lowtax Editorial15 October, 2014

Introduction

1986 was the last time that the United States tax code underwent a significant overhaul, but since then US taxes have got progressively more complex while most of America's competitors have managed to improve their tax systems.

Thirty years of filling the tax code with "pork" (i.e. special interest tax breaks) and the more recent inability of Congress to agree on a plan which would both simplify US taxation and cut income tax rates have resulted in the United States possessing one of the least competitive tax systems in the entire Organization for Economic Cooperation and Development (OECD) grouping.

Critical factors behind America's poor showing in the ITCI are its high rate of tax on corporate income and its worldwide system of taxation; only five other OECD countries have a fully worldwide tax basis. The US also scores poorly on property taxes due to its estate tax and poorly structured state and local property taxes, its individual taxes with a high top marginal tax rate and the double taxation of capital gains and dividend income.

The Tax Foundation considers taxes to be "a crucial component of a country's international competitiveness," observing that: "In today's globalized economy, the structure of a country's tax code is an important factor for businesses when they decide where to invest. No longer can a country tax business investment and activity at a high rate without adversely affecting its economic performance."

"In recent years, many countries have recognized this fact and have moved to reform their tax codes to be more competitive," it adds. "However, others have failed to do so and are falling behind the global movement."

The Foundation points out that the US "provides a good example of an uncompetitive tax code."

"The last major change to the US tax code occurred 28 years ago as part of the Tax Reform Act of 1986," the Foundation notes. "Since then, the OECD countries have followed suit, reducing the OECD average corporate tax rate from 47.5 percent in the early 1980s to around 25 percent today. The result: the US now has the highest corporate income tax rate in the industrialized world (at 39.1 percent  consisting of the federal tax rate of 35 percent plus the average tax rate among the states)."

Not that the steady decline in US tax competitiveness has passed by Congress and successive administrations. It would be hard to find a member of Congress who would disagree with the assertion that US taxes need to be reduced and simplified; tax complexity is a recurring theme of the independent US National Taxpayer Advocate in her annual reports to Congress, and it is estimated that it takes US taxpayers (both individuals and businesses) more than 6.1bn hours to complete tax filings at a cost, in 2010, of around USD168bn (according to the NAT's 2012 Annual Report). This is time and money that could be spent on more productive, economy-boosting activities.

Hence, there has been no shortage of ideas and legislative proposals for tax reform. But, alas, the history books are full of accounts of politicians promising big but delivering small when it comes to taxation, and the United States is certainly no exception. Virtually every presidential candidate in recent election campaigns has promised radical measures to dramatically scale back the tax and administrative burden on taxpayers. For instance, in 2007, President Obama pledged that if elected to the White House, the vast majority of taxpayers would eventually be able to complete their tax returns in five minutes on postcard-size tax returns. He also claimed that the middle class tax burden would be relieved by USD85bn, that 150m Americans would have a tax cut of up to USD1,000, and that seniors with annual income of less than USD50,000 wouldn't have to pay income tax. Evidently, President Obama has failed to deliver on any of these promises!

The problem is though, while most lawmakers are well-intentioned when it comes to tax reform, presently the two main parties in Congress disagree on the detail, and, more importantly, what the outcome of tax reform should be: i.e. should it help to cut the deficit by raising tax revenues (as the Democrats believe), or be at the very least "revenue neutral" (as Republican lawmakers insist)?

As President Obama's administration has gone on, the parties have become increasingly entrenched in their respective camps, and the prospect of any new tax legislation in the current congressional session, which has just weeks left to run, would appear to be low-to-zero. And, depending on whether the Democrats hang on to the Senate or not (the Republicans would appear to have a firm grip on the House of Representatives), the deadlock could continue in the subsequent two years before the 2016 presidential elections.

Nevertheless, elements of the tax reform proposals put forward recently are likely to form a basis for any future tax reform bill, and it must be hoped that at some point in the future, Congress will be in a position to make the bold change being called for by taxpayer and business advocacy groups. The remainder of this feature summarizes the main plans proposed during the Obama Administration.

The Wyden-Gregg Plan

In February 2010, Senator Ron Wyden (D  Oregon) and former Senator Judd Gregg (R  New Hampshire) introduced legislation that was intended to perform the most widespread clean-up of the US tax code since the Tax Reform Act 1986.

The 2010 Bipartisan Tax Fairness and Simplification Act aimed to clear out the tangled web of nearly 10,000 exemptions, deductions, credits and other preferences that currently clutter the US tax code in a bid to create a simpler and fairer system. This would also free up revenue for America's high federal corporate tax rate to be reduced to a flat 24 percent.

For individuals, the bill proposed to:

Eliminate the Alternative Minimum Tax;

Reduce the number of individual tax brackets from the current six to three: 15 percent, 25 percent, and 35 percent;

Enable a simple one-page 1040 tax return form with the option that taxpayers can request that the IRS prepare a tax return for them to review and sign.

For business, the bill would:

Allow more than 95 percent of small businesses  those with gross annual receipts of up to USD1m  to permanently expense all equipment and inventory costs in a single year;

Reduce the top corporate tax rate and replace the existing six corporate rates and eight brackets with a single flat rate of 24 percent;

Eliminate a number of specialized tax breaks that favor one business sector or group of individuals over another, thus making the tax code simpler and fairer;

Retain preferential treatment for capital gains in order to encourage investment, by creating a new 35 percent exclusion and a progressive rate structure for dividend and long-term capital gains income. The bill would also cut the holding period to six months from one year for the first USD500,000 of a taxpayer's capital gains income;

Repeal the rule that allows US companies to defer taxes on their foreign income;

Create a more even playing field between corporate debt and equity by cutting the value of inflation from a corporation's interest deduction on debt.

"This proposal echoes the successful tax reform championed by President Reagan and Senator Bill Bradley during the mid-1980s, Gregg said. "And it is time that we return to this sort of common-sense, bipartisan approach."

There is much to admire in the Wyden-Gregg plan, and doubtless many member of Congress across the party divide supported at least some aspects of it. However, the bill wasn't even voted on, and died when the 111th Congress expired in January 2011.

Senator Enzi's Job Creation And International Tax Reform Plan

In February 2012, Senator Michael B. Enzi (R  Wyoming), a member of both the Senate Finance and Budget Committees, introduced the United States Job Creation and International Tax Reform Act of 2012, designed to modernize the rules for taxing the global operations of American companies and provide a tax break for those companies repatriating profits from overseas.

In summary, the proposed legislation would allow a US-based company earnings currently sitting offshore to be brought back to America at a reduced tax rate; provide an exemption from US tax for foreign earnings already subject to taxes in a foreign country; and reduce the US tax burden on certain income derived from intellectual property.

The bill provides a 95 percent exemption from US tax for foreign earnings that have already been subject to tax in a foreign country similar to the tax systems that the US's major trading partners have adopted, and creates a "level playing field" for US-headquartered companies when they compete in foreign countries by nearly eliminating the additional US tax that is imposed on foreign profits when they are brought back to the US.

It would also allow for foreign earnings currently held overseas to be brought back to the US at a reduced tax rate for a one-year period. As part of a transition to the new tax system, the legislation proposed that in the first year after enactment, US multinationals would have an option to either distribute cash dividends to the US from their controlled foreign corporations (CFCs), or simply include in their US taxable income any or all of their foreign earnings currently being held offshore.

The tax due on these earnings could be paid over a period of up to eight years, and a one-time 70 percent dividends-received deduction would be available for foreign earnings repatriated, both actual and deemed, from a CFC from pre-2013 earnings. Under the plan, neither a credit nor deduction would be permitted for foreign taxes attributable to amounts with respect to which the 70 percent deduction is elected.

If a company chose not to distribute foreign earnings to the US during the one-year period, then it would be subject to the full US tax rate when the earnings are brought back home. The benefits of the new tax system would also be delayed for that company until all of those foreign earnings were subject to full US taxation.

The bill would also impose a reduced US tax rate on certain income generated by domestic companies from intangible assets. There has been, it was said, a "worry the current US tax system encourages US-headquartered companies to transfer rights to certain ideas and inventions to low- or no-tax countries. This bill, through a reduced US tax rate on the income from IP, would encourage companies to develop and keep rights to the ideas and inventions in the US."

A provision would therefore allow for a deduction equal to 50 percent of the qualified foreign intangible income of a domestic corporation. Foreign intangible income is considered derived from a US corporation's active conduct of a US trade or business only if the domestic corporation developed, created, or produced the intangible asset giving rise to the income through the active conduct of the trade or business within the US.

"The current tax structure acts as a great wall, keeping money outside of US borders," Enzi said. "The new tax structure creates a breach, the good kind, that allows money to flow back in. This increase in capital not only will mean more jobs and a more stable US economy, it will mean more tax revenue for our indebted federal government."

Like the Wyden-Gregg bill before it, Enzi's legislation died when the 112th Congress expired just under a year after its introduction.

The Baucus Discussion Drafts

After working closely with House Ways and Means Chairman Dave Camp (R  Michigan) in the previous two years on the issue of tax reform, former Senate Finance Committee Chairman Max Baucus (D  Montana) issued a series of discussion drafts towards the end of 2013, including in the areas of tax administration, cost accounting and energy taxation. By far the most controversial was his international tax reform discussion draft, which differed considerably from the ideas advanced by Enzi, and later by Camp and are outlined here.

Baucus's proposals were intended, he said, to detail "ideas on how to reform international tax rules to spark economic growth, create jobs, and make US businesses more competitive."

The draft repeals the deferral system for the earnings of foreign subsidiaries of US companies and replaces it with what is said to be a more competitive system under which all such income is either taxed immediately when earned or exempt from US tax, after which no additional US tax is due.

In particular, passive and highly-mobile income and income from selling products and providing services to US customers would be taxed annually at full US rates, and the discussion draft includes two options that apply an annual minimum tax to income from products and services sold into foreign markets.

One option would apply immediately, to tax all such income at a minimum rate (80 percent of the US corporate tax rate with full foreign tax credits), coupled with a full exemption for foreign earnings upon repatriation, while the second would immediately tax all such income at a lower minimum rate (60 percent of the US corporate rate) if derived from active business operations but at the full US rate if not, coupled with a full exemption for foreign earnings upon repatriation.

In addition, historical earnings of foreign subsidiaries that have not been subject to US tax would be subject to a one-time tax at a reduced rate of20 percent payable over eight years. Credits are allowed for taxes paid to foreign jurisdictions to the extent the associated income is subject to US tax.

Amongst other provisions, the discussion draft limits income shifting through intangible property transfers; denies deductions for related party payments arising in a base erosion arrangement; and limits interest deductions for domestic companies to the extent that the earnings of their foreign subsidiaries are exempt from US tax and the domestic companies are over-leveraged when compared to their foreign subsidiaries.

While Baucus said tax reform as a whole should raise significant revenue for deficit reduction, the international tax reform discussion draft was intended to be long-term revenue neutral. "While not a final plan," he added, "the discussion drafts are intended to spur a conversation about areas where Republicans and Democrats may be able to reach agreement on how to fix the broken tax code."

However, his overall revenue-raising objective for tax reform immediately raised the hackles of Republicans, who view revenue-neutral tax reform as an opportunity to reduce tax rates. Senate Finance Committee Ranking Member Orrin Hatch (D  Utah) commented that "the bipartisan desire to overhaul our tax code has become mired in the partisan desire by some to raise taxes under the guise of so-called tax reform."

Comments from US business associations were focused specifically against the discussion draft's international tax reform proposals. For example, the Let's Invest for Tomorrow (LIFT) America Coalition, which has campaigned against the US' current "worldwide" international tax system, stated that "instead of moving the US closer to a more competitive tax system, the draft's provisions actually take the nation further away from the pro-growth, pro-jobs business tax reform that American companies and workers are seeking."

Issued shortly before Baucus was confirmed as the next US Ambassador to China, the discussion draft had the feel of being somewhat rushed out into the public domain. But ultimately, the Baucus plan reinforced doubts over whether tax reform could receive bipartisan support.

The Camp Discussion Draft

In February 2014, Dave Camp issued his long-awaited income tax reform discussion draft, which proposes to reduce maximum tax rates and simplify the tax code over 182 pages of a section-by-section "summary." In fact, his document is probably the most comprehensive tax reform document published by a Congressman since the 1986 Tax Reform Act.

Highlights of the revenue-neutral Tax Reform Act of 2014 include a new individual and corporate income tax rate structure. Using changes to individual and business tax breaks, it flattens the individual tax code by reducing rates and collapsing the current brackets into two of 10 percent (encompassing the present 10 percent and 15 percent bands) and 25 percent, "ensuring that over 99 percent of all taxpayers face maximum rates of 25 percent or less."

An increased standard deduction of USD11,000 for individuals and USD22,000 for married couples would result, according to the Joint Committee on Taxation, in nearly 95 percent of taxpayers not requiring to itemize their individual tax deductions.

The six different family tax benefits (basic standard deduction, additional standard deduction, personal exemptions for taxpayer and spouse, personal exemptions for dependents, child tax credits, and head of household filing status) would be assimilated into the larger standard deduction, an additional deduction for single parents, and an expanded child and dependent tax credit of USD1,500 per child and USD500 per dependent.

In addition, the highly complex Earned Income Tax Credit (EITC) would be simplified by converting it into an exemption of a certain amount of payroll taxes (both the employee and employer shares). Depending on household circumstances, families could be shielded from as much as USD4,000 in payroll tax liability. It is hoped that this would also eliminate the estimated USD133bn lost over 10 years in erroneous and fraudulent EITC payments.

The tax reform package would also allow up to USD8,750 (half of the contribution limit) to be contributed either to a traditional retirement account (where tax is paid when taking a pension) or a "Roth" account (where contributions are made after tax). Any contributions in excess of USD8,750 would be dedicated to a Roth-style account  making these savings tax-free during retirement.

Mortgage interest relief is the largest individual tax expenditure permitted by the tax code. But under Camp's plan, beginning in 2015, for those taking out new mortgages, the existing USD1m cap would be reduced so that for mortgages taken out in 2018 or later, the cap would be USD500,000.

The reform package would also cancel the AMT for individuals, pass-through businesses and corporations, while long-term capital gains and dividends would be taxed as ordinary income, with an exemption for the first 40 percent of such income from tax.

Of specific interest to those pass-through business owners paying individual income taxes, it is pointed out that nearly every small business would benefit from paying no more than a top tax rate of 25 percent; the double taxation of investment income being lowered to historic lows; the repeal of the AMT; simplified compliance through various reforms of business deductions and credits; permanent section 179 (full deduction on cost of qualifying equipment) expensing on as much as USD250,000 in capital investments each year, including real property; an expansion of the use of cash accounting for businesses with gross receipts of up to USD10m; and a maintenance of the current law on the estate tax.

Using the reform of a large number of business-related exclusions and deductions, the plan also reduces the maximum corporate tax rate from 35 percent to 25 percent on a gradual basis. For taxable years beginning in 2015, the maximum rate falls to 33 percent; for taxable years beginning in 2016, the maximum rate falls to 31 percent; for taxable years beginning in 2017, the maximum rate becomes 29 percent; and for taxable years beginning in 2018, the rate reduces to 25 percent.

It is notable that the corporate tax break changes include making the Research & Development Tax Credit permanent and improving its terms. The simplified research credit would be equal to 14 percent of qualified research expenses that exceed 50 percent of those expenses for the three preceding taxable years.

Interestingly, the package would also transform US international tax rules by replacing the current "worldwide" system with a "quasi-territorial" 95 percent dividend exemption for foreign business income. The exemption would apply to dividends paid by foreign companies to US corporate shareholders owning at least 10 percent of their shares, and no foreign tax credit would be allowed for any taxes paid or accrued with respect to any dividend for which the 95 percent deduction is allowed.

Thus, the effective US tax rate on most foreign dividends would be 1.25 percent (the new 25 percent rate multiplied by the 5 percent of income that is not exempt)  putting American companies on a more level playing field with foreign competitors. The proposal would also end the "lock-out effect" that discourages companies from bringing foreign earnings back to the US.

Although Camp has worked tirelessly on tax reform over the last three or four years, he must have known that his comprehensive blueprint would stand very little chance of being introduced in Congress, let alone debated and passed, before the 113th Congress expired in January 2015. However, in a sense that was not really the point. As House Majority Leader John Boehner (R  Ohio) put it at the time the Tax Reform Act 2014 was published, the draft was intended to start a "conversation" on the issue of tax reform, and its proposals could form the basis of an eventual tax reform bill when Congress is in a position to consider one.

As Hank Gutman, Director of KPMG's Federal Tax Legislative and Regulatory Services group observed: "these proposals will create a context for debate and could serve as a template for subsequent reform efforts. Business leaders would be wise to take the time to understand these proposals, so that they can begin to assess their potential implications."

The Rubio-Lee Tax Reform Framework

While not releasing full proposals, Senators Marco Rubio (R  Florida) and Mike Lee (R  Utah) introduced in September 2014 a framework for US tax reform that would simplify the tax code, while cutting both individual and corporate income tax rates.

In essence, their "pro-growth" plan  as divulged in a Wall Street Journal joint op-ed  would introduce only two individual tax rates (at 15 percent and 35 percent), cancel most tax deductions, eliminate the so-called "marriage penalty" (by increasing the income tax threshold for married couples), and increase the child tax credit.

It would also reduce the corporate tax rate, move to full expensing in any tax year, and move from the present "worldwide" tax system to a "territorial" tax system where "businesses [would] only be taxed in the country where income is actually earned."

In the op-ed, they proposed "a federal tax-reform plan that will remove obstacles to investment, innovation, growth, and opportunity."

"The current tax code taxes too much, taxes unfairly, and conspires with our outmoded welfare system to trap poor families in poverty, rather than facilitate their climb into the middle class. Our reforms seek to simplify the structure and lower rates."

On their plans to increase the child tax credit by USD2,500, up from USD1,000, Rubio and Lee pointed out that "children aren't consumer goods  they are investments parents make in their futures, and in the future of America, and therefore deserve to be treated as such in our tax code. Our proposal would account for this and level the playing field for working parents."

With regard to corporate taxes, the headline rate would be cut to make it more internationally competitive, but the outline declined to propose a new rate. "The exact rate will be determined as we continue to shape the legislation," Rubio and Lee wrote, "but it must be low enough to end the problem of corporate inversions and the loss of American jobs to other nations."

The plan will also allow companies large and small to deduct their expenses and capital investments while integrating all forms of business taxation into a consolidated, "single-layer tax."

President Obama's Economic and Fiscal Panels

National Commission on Fiscal Responsibility and Reform

In 2009, the federal budget deficit topped USD1.4 trillion, and in 2010 President Obama created the bipartisan National Commission on Fiscal Responsibility and Reform which was charged with identifying policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run. One of the Commission's three panels was the Tax Reform Working Group, led by Camp and Senator Kent Conrad (D  North Dakota).

Supposedly, all taxes and spending cuts were to be considered at the Commission's meetings, and prior to the first round of discussion in April 2010, Commission Co-Chairman Erskine Bowles, a former White Chief of Staff in the Clinton administration, said that "everything is on the table" regarding tax and spending, regardless of President Obama's pledge not to raise taxes for those earning less than USD200,000 a year.

Unsurprisingly, the Commission's final report, issued in December 2010, observed that the US tax code "is rife with inefficiencies, loopholes, incentives, tax earmarks, and baffling complexity. We need to lower tax rates, broaden the base, simplify the tax code, and bring down the deficit. We need to reform the corporate tax system to make America the best place to start and grow a business and create jobs."

The Commission's report called for a reduction in the number of individual income tax brackets to three, 12 percent, 22 percent and 28 percent, from the present six rates of up to 35 percent (39.6 percent from 2013). Other recommendations were the abolition of the AMT, the curbing of tax expenditures, the capping of mortgage interest relief and capital gains and interest treated as ordinary income.

On the corporate side, the Commission proposed to reform corporate taxes, by establishing a single corporate tax rate between 23 percent and 29 percent. However, general business tax credits and business tax expenditures  currently numbering more than 30 and 75 respectively  would be curtailed.

In the end, the Commission's two co-chairs, Bowles and Alan Simpson, the former Republican Senator from Wyoming, failed to get the requisite votes from the panel members for the proposals to be considered by Congress.

The President's Economic Recovery Advisory Board

In between the inception of the Fiscal Commission and its final report came the a report from the President's Economic Recovery Advisory Board (PERAB), an advisory panel established in 2009 and chaired by former Federal Reserve Chairman Paul A. Volcker.

PERAB's members were drawn from outside the Government and the panel had seven sub-committees, including one on tax reform.

The PERAB tax reform report fulfilled the specific mandate given to the sub-committee, which was to discuss the pros and cons of a spectrum of reform ideas. They were also instructed not to consider policies that would raise taxes on families making less than USD250,000.

As specified in a posting by Austan Goolsbeeat the time of the report's release, the PERAB's staff director and chief economist, the report was meant to be informative rather than to draw conclusions. Its intention was to aid discussion about the wide variety of tax reform ideas in these areas.

For example, considering the complexity of US tax law, the subcommittee looked at tax simplification options for families, such as the consolidation of family credits and simplification of eligibility rules, and the clarification and improvement of savings incentives. It also looked at simplifying the taxation of capital gains.

Reviewing the background on tax compliance, the report contains a section on possible improvements to voluntary compliance and a reduction to the tax gap, including a harmonization of the employment tax rules for businesses and the self-employed.

It provided an overview of corporate taxation, with suggestions for reducing marginal corporate tax rates and increasing incentives for investment, and also addresses international corporate tax issues.

The panel's ideas were intended to feed into the work being undertaken by the fiscal responsibility commission, but the panel was clearly not interested in making any waves in the area of taxation.

The Jobs and Competitiveness Council

In early 2011, President Obama established the Council on Jobs and Competitiveness to provide non-partisan advice to the President on ways to strengthen the US economy. In January 2012, the Council presented its 72-page report, including recommendations to create a simpler, more efficient tax system that "levels the playing field for businesses and makes the US more competitive internationally."

Overall, in order to enhance economic efficiency, encourage more investment in the US, and boost economic growth, the Jobs Council recommended moving from a corporate income tax system with a high tax rate and a narrow base to one with a broader tax base and a lower overall rate.

At the same time, the Council confirmed that the current worldwide system of corporate taxation discourages companies from investing their foreign earnings in the US, and the result is "an outdated and extremely inefficient system that creates economic distortions and puts US businesses and workers at a disadvantage".

Many Council members therefore agreed that the US should shift to a territorial system of taxation in order to make the US more competitive in global markets. "Adopting a territorial tax system would bring (the US) in line with our trading partners and would eliminate the so-called 'lock-out' effect in the current worldwide system of taxation that discourages repatriation and investment of the foreign earnings of American companies in the US."

The Council has also urged Congress and the Administration to begin work on tax reform immediately. "Both parties in the House of Representatives and the Senate should make a public commitment to getting reform done and they should begin the process now," it recommended.

It is plain to see however, given the ongoing legislative paralysis in Congress on tax issues that these recommendations remain on the drawing board.

President Obama's Corporate Tax Reform Plan

In what was turning out to be a bewildering mix of fiscal panels and reports, in February 2012, the Treasury Department issued a report presenting President Obama's revenue-neutral proposals for corporate tax reform, cutting the tax rate to 28 percent. However, the report also dealt with some of the President's pet hates, like the deferral provisions, carried interest and tax breaks for "big oil," which was guaranteed to bring him into conflict with Republicans.

The report's framework for reform begins with its proposals to eliminate tax loopholes and subsidies, broaden the tax base and cut the corporate tax rate to 28 percent, putting, it was claimed, the US "in line with major competitor countries and encouraging greater investment."

The President's plan would "start from a presumption that we should eliminate all tax expenditures for specific industries, with the few exceptions that are critical to broader growth or fairness."

For example, the "last-in, first-out" method of accounting for inventories would be ended; oil and gas tax preferences would be eliminated, including, for instance, repealing the expensing of intangible drilling costs and the percentage depletion for oil and natural gas wells; and the treatment of insurance industry products would be reformed to stop major corporations using them as a form of tax shelter for major corporations.

The treatment of "carried interest" as ordinary income, rather than capital gains, would also be established, and the special depreciation rules for corporate purchases of aircraft would be eliminated.

Secondly, the report proposed to strengthen American manufacturing and innovation, by refocusing the manufacturing deduction and using the consequent savings to reduce the effective rate on manufacturing to no more than 25 percent, while encouraging greater research and development and the production of clean energy.

Thirdly, it would also strengthen the US international tax system, including establishing a new minimum tax on foreign earnings, to encourage domestic investment. "Our tax system," it is said, "should not give companies an incentive to locate production overseas or engage in accounting games to shift profits abroad, eroding the US tax base".

Fourthly, taxes would be simplified and cut for small businesses. Tax filing would be made simpler for small businesses and entrepreneurs, so that they can focus on growing their businesses rather than filling out tax returns.

And, finally, business tax reform should be fully paid for and lead to greater fiscal responsibility, by either eliminating or making permanent, and fully paying for, temporary tax provisions now in the tax code.

While this was the first Obama proposal for corporate tax reform, and it included certain elements which can be found in other proposals, including those coming out of the Republican Party, parts of it were fundamentally at odds with the Republican corporate tax agenda.

Chief among those differences, observed Camp "is the Administration's apparent decision to expand a system that double taxes American employers when they try to compete with foreign corporations. I also want to more closely review how the Administration intends to bring home roughly USD1 trillion in American profits that are currently trapped overseas."

Above all, he commented that "the Administration's proposal fails to address the need for comprehensive reform of our tax code. More than half of all business income is taxed at the individual (rather than corporate) tax rates, and a corporate-only proposal does not address the needs of those job creators, the vast majority of which are small businesses. If we want to truly reinvigorate our economy and get Americans working again, we must address comprehensive tax reform."

In Summary

The amount of energy expended by Congress and the Administration on the issue of tax reform is a clear admission from both sides of the political divide in Washington that the US tax code is in urgent need of attention.

It is also fairly obvious from the above that Democrats and Republicans agree on many things. Most want to see individual tax rates flattened and the system simplified. Even in the area of corporate taxation, there seems to be a consensus that the current 35 percent tax rate is about 10 percent too high, although it is hard to agree with the President's assertion that a cut to 28 percent would bring the US "in line" with most of its competitors, when the global average is now nearer 20 percent than 30 percent.

There is also broad agreement that there are many corporate tax breaks that can be dispensed with (ironically, given that Congress is the institution responsible for allowing special interest tax breaks to proliferate in the first place) making the system less unwieldy, and reducing opportunities for tax sheltering.

Where the two parties differ the most is with regard to reform of the international corporate tax rules, and one's view of what the US international tax system should look like depends on which ideological prism is being used to view the issue through.

Both parties want US multinationals to invest more of their profits and huge reserves of cash in the United States. But whereas the Democrats think the best approach is to punish "unpatriotic" big business for "shipping jobs overseas" with higher taxes, the Republicans are generally of the view that multinationals should be encouraged to invest domestically with a tax system more aligned with international norms, and that is more territorial in nature.

It is a debate that has been crystalized by the corporate inversion issue, and the actions of both parties reflect their respective positions on tax. The Treasury, supported by senior Democrats, has announced a short-term fix that tightens the tax rules on inverting companies. Republicans on the other hand argue that if comprehensive tax reform was brought about along the lines of proposals issued by Camp and other Republicans, US companies would have far less motivation to invert.

For the foreseeable future however, few things are likely to change, and the two parties will continue to argue over the same things like a broken record, with neither side seemingly willing to concede an inch of ground. While this remains the political status quo, America will be stuck with its broken tax code.

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